Guernsey: Guide To Guernsey Foundations

PREFACE

This Guide is intended to provide basic information needed to
answer questions on Guernsey foundations and the migration of
foreign law foundations to Guernsey.

It is recognised that this Guide will not completely answer
detailed questions which clients and their advisers may have. The
Guide is, therefore, designed as a starting point for a more
detailed and comprehensive discussion of the issues and does not
constitute legal advice. For more information the Appleby team will
be happy to assist and contact details can be found at the end of
the Guide.

1. INTRODUCTION

The long-awaited Foundations (Guernsey) Law 2012 (the
"Law") was approved by the States of Guernsey in July
2012 and is currently awaiting Privy Council consent, which is
expected at the start of 2013.

This additional or alternative wealth management vehicle, and
the structuring opportunities that accompany it, is likely to be of
considerable interest to a wide variety of clients, in particular
for those from civil law countries less familiar with trusts. It
will also be of interest to those with existing foundations who are
attracted to Guernsey's G20 "white" list status and
excellent wealth management reputation and who are looking to
migrate their existing foundations from less well regulated or less
convenient jurisdictions.

2. WHAT ARE THE KEY FEATURES OF A GUERNSEY FOUNDATION?

The Guernsey foundation is an incorporated entity with separate
legal personality but which, unlike a company, does not have
shareholders. Instead, it holds assets in its own name on behalf of
beneficiaries, particular purposes, or both, and it operates in
accordance with a constitution comprising of a charter and a set of
rules. Unlike a company, it cannot carry out commercial activities
except those necessary for, or ancillary or incidental to, its
purpose1. As such it will be an entirely new legal entity for
Guernsey: it will look similar to a company but its operation will
be more akin to that of a trust.

Once incorporated at the request of the founder, the foundation
will act through its council which will govern the foundation in
accordance with the terms of the foundation's constitution. The
council members perform much the same role as trustees. Although
not specifically expressed to have a fiduciary duty, the Law
nonetheless specifies that the council must act in good faith. If
the terms of the constitution allow the beneficiaries access to
foundation information, the beneficiaries may hold the councillors
to account by protesting to the court if they do not abide by the
constitution or breach their responsibilities. If the beneficiaries
are barred from receiving such foundation information, they are
termed "disenfranchised" and s.10 of the Law dictates
that the foundation must then appoint a guardian. A guardian must
also be appointed if there are no beneficiaries or the foundation
has purposes.

Unlike other jurisdictions (such as Jersey), provided the
beneficiaries are "enfranchised" and there are no
purposes, a guardian is not mandatory. Another difference is there
is no requirement for either a council member or the guardian (if
any) to be a Guernsey licensed fiduciary, although in such
circumstances a "resident agent" must be appointed. The
"resident agent" must be a Guernsey licensed fiduciary,
resident in Guernsey, and will have rights to view such foundation
information as is necessary to ensure the foundation is complying
with Guernsey Law.

A Typical Guernsey Foundation Structure

3. FREQUENTLY ASKED QUESTIONS?

A: How are Guernsey Foundations Incorporated?

A key distinction from trusts, and for some clients a key
benefit of the foundation, is that the Guernsey foundation will be
formally incorporated and registered. The Guernsey company registry
(the "Registrar") will manage incorporations.

Only a Guernsey licensed fiduciary may apply to register a
foundation. To do so they must file with the Registrar: the
Charter, a declaration signed by the founder (or their resident
agent) approving the details set out in the Charter, the applicable
registration fee (expected to be £100 for 24 hour
registration and £350 for two hour registration) and other
details set out in Section 7 of Schedule 1 of the Law - such as the
names and addresses of the councillors and guardian (if any) and
their written consent to taking up their position. In addition, the
foundation must have an initial endowment of assets.

Upon receiving the required information, the Registrar will
inscribe the foundation's name on the register, allocate a
registration number and issue a certificate of registration. The
certificate will state the name and registered number of the
foundation, its registered office, its date of establishment and
its duration (which may be unlimited), and the signed copy will be
conclusive evidence of compliance with the registration
requirements.

B: What are the Charter and Rules?

The Chartermust:

State the name of the foundation. This must include either the
word "foundation" or the abbreviation "Fdn". It
cannot include any word such as "Imperial",
"Royal", "Queen" or "Crown" which
implies, or might be taken to imply, royal or government
connection, support or patronage, unless Her Majesty's
Procureur has given written permission for use of that word. It
also cannot be named so as to induce the public to confuse the
foundation with some other person or body previously established in
Guernsey or elsewhere.

State the purpose of the foundation. A foundation may be
established for any purpose, whether charitable or non-charitable
and may be for the benefit of a named person, class of persons or
simply a general purpose. However it cannot carry out any
commercial activities except those necessary for, and ancillary or
incidental to, its purpose and its purposes cannot be illegal under
Guernsey law. That said it can carry out commercial activities via
an underlying company.

Describe the initial capital of the foundation.

State the duration of the foundation (which may be
unlimited).

Contain a declaration from the founder that he wishes the
councilors to comply with the terms of the Charter. If the founder
does not wish to sign the Charter, his resident agent may do so
instead.

In addition, the Charter may contain any other matter
that the founder thinks fit, or that would otherwise be required or
permitted to be in the Rules.

The Rulesmust:

Prescribe the functions of the Council.

Detail the procedures for the appointment, resignation and
removal of the councilors and any guardian. Unless otherwise
stipulated in the Charter or Rules there must be a minimum of two
councillors.

Detail how the councilors or guardian are to be remunerated.
Unless expressly so authorized in the Rules, they will not be
entitled to any profit from their office.

In addition, the Rules may:

Prescribe the manner in which the property of the foundation
may be distributed, accumulated or applied.

Detail whether, and if so, how, further property may be endowed
upon the foundation.

Provide for the addition or removal from benefit of persons or
beneficiaries – either revocably or irrevocably.

Detail any person's (including the founder's) powers in
relation to the foundation (such as the power to make investment
decisions, remove a councillor or approve the use of the
foundation's assets).

Impose obligations upon beneficiaries as a condition of
benefit.

Make the interest of a beneficiary liable to termination or
subject to certain restrictions.

Give the details of a default beneficiary. If none is given,
the assets will fall to the Crown.

Add any other matter the founder thinks fit.

Only if the Charter and Rules specifically provide, or otherwise
by Royal Court Order, can the terms of either document be
amended.

C: What Powers can the Founder Retain?

A founder may be granted various administrative powers under the
Law including, for example the power to appoint foundation
officials or make investment decisions.

A founder may reserve the power to amend, revoke or vary the
terms of the constitution, or purpose of the foundation, and the
power to terminate the foundation. However, these powers may only
be reserved for a period not exceeding the duration of the
founder's life (if he is a natural person), or for a period not
exceeding 50 years from the date of establishment (if the founder
is a legal person). This restriction is intended to prevent the
reservation powers being so generous that civil law jurisdiction
question the foundation's validity.

D: What Information will be Publicly Available?

As part of the registration process the charter must also be
filed with the registrar but, unlike many other jurisdictions, it
may only be disclosed in certain circumstances (e.g. as part of
criminal investigations).

The only information publicly available is that in "Part
A" of the register which includes the name and registered
number of the foundation, the name and address of the councillors
and the guardian (if any) and the details of the registered
office.

E: What are the Ongoing Regulatory Requirements?

Every foundation must have a registered office in Guernsey, at
which all records of the foundation must be kept. The Registrar
must be notified of any change to: the registered office, the names
and addresses of the council members, guardian and resident agent,
and enfranchised status of the beneficiaries. The name and address
of the registered office must also be included on all
correspondence sent by either the councilors or by the guardian (if
any) on behalf of the foundation.

In addition, standard ongoing anti money-laundering regulations
apply to the Council Members.

Foundations must also file an annual validation, the fee for
which is expected to be £500.

F: What Duties do the Various Parties Have?

The Council is responsible for administering
the assets of the foundation and carrying out its objects in
accordance with the Charter, the Rules and the Law. They owe their
responsibilities to the foundation (not to the beneficiaries) and
must act in good faith in the exercise of their functions. Nothing
in the Charter or the Rules may relieve council members from
liability for fraud, willful misconduct or gross negligence.

The Guardian is only required where there are
"disenfranchised beneficiaries" (i.e beneficiaries barred
from accessing foundation information and thereby holding the
council to account) or where the foundation has purposes. Their
function is to hold the councillors to account given the absence of
stakeholders and the limited rights of disenfranchised
beneficiaries, and they have a duty to both the founder and to the
beneficiaries to perform these functions acting in good faith and
en bon pere de famille (i.e. as a prudent administrator of family
wealth). Like council members they also cannot be relieved from
liability for fraud, willful misconduct or gross negligence.

Where the Royal Court considers a person is not a 'fit and
proper' person for the management of a foundation, and they
consider it is in the public interests to do so, they may issue a
disqualification order prohibiting them from being a council member
or guardian.

The Resident Agent is only required where
neither a council member nor a guardian are Guernsey licensed
fiduciaries. The resident agent must be a Guernsey licensed
fiduciary resident in Guernsey, and has the power to inspect
foundation documents and information.

4. MIGRATION OF FOREIGN FOUNDATIONS

Many clients in countries with civil law roots have historically
avoided common law trust jurisdictions, preferring instead to make
their wealth management arrangements in jurisdictions such as
Liechtenstein or Panama where they are able make use of a
foundation in much the same manner as they might of a company or of
a trust, depending on their particular needs. In Guernsey, the
introduction of the Law will of course lead to the establishment of
new foundations. In addition however, it is anticipated that there
will be persons who will wish to migrate existing foreign law
foundations to Guernsey in order to take advantage of all that
Guernsey has to offer in terms of its 'white' list
regulatory standards, high quality legal and professional services,
mature and sophisticated court system and proximity to London and
Switzerland.

With this in mind, the Law allows foundations with legal
personality currently established under the law of any place
outside Guernsey to apply to the Registrar to be registered as a
Guernsey Foundation. This contrasts with the more restricted
provisions of other jurisdictions: for example Jersey only allows
"recognized entities" to migrate. These "recognized
entities" are a restricted list and currently includes for
example, Panama Private Interest Foundations, Bahamas Foundations,
Liechtenstein Stiftungs, Liechtenstein Anstalts, St Kitts
Foundations and Nevis Multiform Foundations.

As a preliminary requirement to migration the foundation
must:

be able to migrate under the law of the place in which it is
currently established (e.g the constitution of the foundation must
not forbid migration). The foundation must also comply with the
requirements of the relevant foreign law in relation to its
registration as a Guernsey foundation; and

not be under any insolvency process, or be subject to an
application in any court for the same.

A Guernsey licensed fiduciary must then make the application to
the Registrar and include:

a copy of the current Charter and (if different) a copy of the
intended Charter to be binding once Guernsey registered;

evidence that: i) the foundation is authorized by the relevant
foreign law to migrate and is not bankrupt, ii) on the date of
registration, the foundation will cease to be established and
registered under the law of any place outside Guernsey, and iii)
the foundation has legal personality in the place in which it is
established and registered;

a "declaration of compliance". This is a declaration
signed by the Guernsey licensed fiduciary making the application
that all the requirements of Part 1 of Schedule 2 of the Law have
been fulfilled; and

Further standard "migration details", as set out in
Section 5 of Schedule 2 of the Law, such as the names and addressed
of councillors and a statement of the address of the
foundation's registered office (both currently and proposed
address in Guernsey). The Registrar may also request such other
documents and verification as it shall require.

Once the application is accepted the foundation's name will
be allocated a registration number, its name will be put on the
register and it will be issued a certificate of registration. The
certificate shall include, amongst the standard details provided
for new foundations, the details of the place in which the
foundation was previously registered, and any of its previous
names.

5. THE POTENTIAL USES OF A GUERNSEY FOUNDATION

As with trusts, foundations can have multiple uses including in
respect of private, charitable and corporate purposes, and they can
be incorporated into a variety of potential structures tailored to
best suit a particular client's needs.

Private

It is anticipated that foundations may be particularly
attractive as a simple alternative to trusts for private clients
from civil law jurisdictions for whom the concept of a trust may be
unfamiliar or who would like a wealth management entity which would
be easily recognised by third parties in their home
jurisdiction.

In these circumstances a foundation can be used to achieve much
the same ends as a discretionary trust. For example, it is highly
flexible in respect of how long it lasts, how many powers the
founder retains and how much information the beneficiaries are
entitled to. As with trusts, provided they are appropriately
drafted, the foundation may also be a suitable vehicle for asset
protection as they divorce the ownership of the assets from the
founder. It can also be used as part of a larger wealth management
structure: it can act as a trustee (in place of a private trust
company) of a trust, hold the shares of a PTC, act as an umbrella
entity holding various companies or assets, or can be drafted to
hold more high risk, less income producing assets which may not be
appropriate to be held by all trusts.

Charitable

Philanthropic founders may be particularly attracted to the
foundation as an alternative to the trust simply for the positive
connotations already associated with charitable
"foundations" (for example the "Bill and Melinda
Gates Foundation"). There is also the added benefit that the
foundation's purposes do not have to be exclusively charitable
and therefore the vehicle can be more flexible than the traditional
"charitable" trust – for example it may not be
necessary to set up a separate corporate entity for profit focused
aspects of the operation.

Corporate

Since foundations, unlike companies, do not have shareholders
and may also be free from beneficiaries, they are ideal
"orphan" vehicles. As such, in addition to being a
suitable alternative to non-charitable purpose trusts for holding
shares in private trust companies, they are also suitable for off
balance sheet financing, subordinated debt and private equity
structuring.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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